I've written about Brazil pre-Lula and post-Lula and spent the last five years covering all aspects of the country for Dow Jones, Wall Street Journal and Barron's. Meanwhile, for an undetermined amount of time, and with a little help from my friends, I will be parachuting primarily into Brazil, Russia, India and China. But will also be on the look out for interesting business stories and investing ideas throughout the emerging markets.

In Europe, Anemic Is The New Sexy

More fund managers overweight Europe, betting on better 2014 and streamlining European companies.

It’s true for all contrarian investors: you have to be greedy when everyone is fearful. Imagine those who had the guts to buy the S&P 500 in March 2009 when it closed at a low of 683 on March 6. For the past several months, this is how the smart money has viewed Europe.

“The game changer came 11 months ago,” says Marc Tommasi, managing director of international investments at Manning & NapierManning & Napier, which manages around $50 billion. The ECB turned on the spigots. It’s saved the bond market from implosion. Mario Draghi, the ECB’s president, is on standby if anything becomes unbearable. He took out the increasing crescendos of stress. Thanks to the ECB, when Cyprus needed a bailout greater than its entire GDP, the market barely fell 3% and recovered two days after. “We have reached a point where key European economies are no longer plugging up holes all the time and are starting to focus on growth,” Tommasi says.

Manning & Napier’s Favorites

The S&P 500 has been on a tear. Japan’s stock market is also rising much higher. Over the last two years, the U.S. has become what the emerging market was: rapid growth in securities prices, particularly stocks and bonds. Europe has been the laggard. It still is. The MSCI Europe index is only up 6.6% year-to-date while the S&P is up over 14% and MSCI Japan is up more than 20%. Europe is next to make a move. And their multinationals are priced at a discount still.

Tommasi likes SiemensSiemens, trading at 14x and still down on the year. He also likes AdidasAdidas, one of his more expensive stocks, trading over 30x while Nike is trading around 25x. “It’s getting closer to a fair price,” he admits. “There’s not a lot of upside.” Another favorite is Brenntag, a German distributor of industrial chemicals.

According to the IMF, troubled south European countries have improved their balance sheets from death-defyingly bad to just bad. In fact, all countries (except Ireland) are expected to post primary budget surpluses in 2013. Additionally and very encouragingly, the peripheral countries are continuing the process of restructuring their economies, they are becoming more competitive, the big multinationals are trimming the fat, selling off divisions that have low margins, and concentrating on core businesses, as is the case of Siemens, which is getting out of the light bulb business.

What’s So Great About Europe?

Keeping in mind that investors want to buy low and sell high, Europe is still far and away the most risky advanced economy. But it is a $17 trillion economy. It is on of the richest places on Earth. Some of the most beloved brands are headquartered there, whether it’s Gucci or Addidas. The multinationals in this old world have their hands all over the globe. They benefit from emerging market growth more than most American companies, like HSBC Bank for example, and Siemens, which is focusing more on equipment for high cost infrastructure projects like bullet trains in Asia.

“I was in Europe two weeks ago and my takeaway is that companies have good balance sheets,” says David Marcus, chief investment officer of Evermore Global Advisors in Summit, New Jersey. And what are they doing with better balance sheets? ”Some are buying growth. There’s new M&A. Investors are starting to wake up to that and starting to participate. Europe is not growing. But corporations are laser focused. The government may be kicking the can down the road,” he says about postponing life-altering policies like creating a fiscal union. Companies are not kicking the can down the road. “I got in early on Europe and had an awful 2011. Three years ago, Greece was a mess. Everyone said it was the end of the euro. (German chancellor) Angela Merkel hated any idea of cutting Greek debt to make it affordable. But they approved it anyway. They did the haircuts, then came another one and now no one talks about Greece leaving the euro today. Then Cyrpus happened. Know what I did that day? I made a buy list for Europe.”

Some of his favorites in Europe include big holding companies that invest in famous brands.

Bollore in France is one. It’s run by Vincent Bollore, a value investor putting money into an eclectic collection of companies from African container terminals to the Bollore Bluecar, an electric Zipcar running in France.

Belgium-based holding company Ackermans & Van Haaren is another. “They buy distressed assets from distressed sellers. The other half of their business is wealth management. You’re putting your faith in management that wants to do what Baron Rothschild said you should do: buy when there’s blood in the streets,” Marcus says.

The economic reality remains that most of the continent is in recession. Even economic heavyweights Germany, France, and the Netherlands have succumbed to much weaker economic momentum over the last year. As for the peripheral countries, they are facing much deeper recessions than the core, and additional challenges of high public and private debt loads, very high unemployment, falling wages, and therefore low consumer confidence.

If the IMF’s base case scenario is right, next year will be better. If that’s so, stock pickers who find the right company at the right price will be rewarded in t2014.

According to the IMF’, here is where growth is heading in Europe this year and next:

There will be more bad headlines. In each crisis, investors will write off the future, saying the market’s never coming back. Says Marcus, “There are maybe four or five opportunities in your investing career when you have to jump on in and not jump out windows.”

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.